It’s never too early to start the planning process for the handover of a family business, writes Stewart Dunne
The family business has been a staple of Irish life for centuries. However, family-run businesses today face many unique challenges, from bigger competitors and changing social habits, to the appetite of younger family members to take up the reins.
If the business is to survive, proper succession planning is key. These tips will help make succession planning easier.
Have an early family discussion, even if it’s difficult
The conversation on succession planning can quite often be a difficult one to open up. Parents and children may have very different views on what should be done with the business and in deciding which of the family should/should not take over the running of the family business. Sometimes the person most suited to taking on the business may not want it or there may be difficulties with sibling rivalry where several close family members are involved in or interested in the business. The time commitment and other challenges to successfully running a family business may be off-putting to children who have seen this first hand while growing up. It’s important for all family members to know exactly where they stand with regards to the family business at as early a stage as possible.Tip 2.
Secure professional financial advice early
A very obvious factor, yet one that is often neglected, is to ensure that the retiring owners of the business get enough from the sale to fund their retirement. In addition, close attention needs to be given to the ability of the children to fund buying the business and to ensure that there is enough working capital left to effectively run the business. This is where sound financial advice is critical at an early stage and when a realistic timeline for the transfer of the business should be set.
Ireland is again the fastest growing economy in the EU, a position it has held for a number of years. However, when deciding whether to sell or pass on a business, it is important to consider: Why are you selling? Is it the right time to sell? How should you value the business? Will there be a large tax bill to pay? What will you do with the proceeds? Anyone considering doing this must get proper professional advice early on as the consequences of getting this wrong can be significant.
Test the hunger of the younger generation
One of the issues facing family-run businesses is a lack of enthusiasm from the younger generation to take up the reins in what can often be a labour-intensive enterprise. It is important to know exactly how passionate the next generation is for the business. Are they willing to put in the work necessary to continue its success?
Prepare the next generation to take over
When should succession planning start? The simple answer is it’s never too early to start. A good strategy, and one that has worked for successful family groups, is for the children to go and work outside of the business for a few years to gain experience that they can then bring back and use when they eventually take over. This may involve working in a larger but similar type organization, travelling abroad and bringing back new ideas, or getting a qualification or training in an area that will benefit the new owner when they take over the business.
Ensure the value the current owner brings isn’t lost
At the very least, a retiring owner should be getting advice three to five years in advance of their planned retirement date. The most common reason for failing to successfully pass on a family-run business is insufficient planning. This period should also be used to identify and put in place the necessary structures to facilitate the clean hand-over of the business.
Prospective owners must not underestimate the role, influence and involvement of the current owner. This can be evident in a number of areas, e.g. customer loyalty, staff loyalty/morale, relationship with suppliers, financial acumen, etc. The new owner must decide from the outset if/how the current owner will still be involved. They must also be clear on which employees (family and non-family) will remain in the business. They must be mindful of the impact on staff/customers of the business of a change in ownership and get help from the current owner in managing this transition.
Finally, and perhaps most importantly, they must have a firm grasp of the numbers so that they know the amount of capital that’s required to run the business and to be confident that there will be profits and willing debt providers to fund the business into the future.
About the author: Stewart Dunne is a Partner in the Audit Department of BDO Ireland, with 25 years’ experience in auditing, financial reporting and consulting.